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Sticking To Basics

The idea of investing via SIPs is getting misinterpreted, but the concept will still continue to hold true…

Long-term readers of Mutual Fund Insight would by now be extremely familiar with the reverence with which we hold the concept of SIPs. There’s practically never any advice from Value Research given in any medium which does not point towards SIPs as the most desirable way of investing in mutual funds.

One of the reasons is that we feel that the whole idea of regular investing through an SIP is getting somewhat misrepresented. There’s an emphasis on representing SIPs as an investing trick, a sort of a mathematical curiosity that can magically yield positive returns no matter what the state of the actual investment or the equity markets.

This is a travesty of what we think SIP is all about it. In an absolutely fundamental way, regular, systematic investing has less to do with the investment and more to do with the investor. We know that the cost averaging that comes with SIPs is what generates the returns, but the real value comes from the fact that SIPs give investors a way of managing their own emotions. This is an investing tool, but its value comes from being able to manipulate the investor’s own psychology.

However, there’s little doubt that despite being universally acknowledged as the best way of investing in mutual funds, SIPs haven’t captured the imagination of the Indian investor as well as they should have. If the Indian investor had really understood the mantra of systematic investing, then we wouldn’t be writing about it. As a matter of course, all fund investments would have been done through the regular and systematic route.

I believe that SIPs not taking off on the scale they deserve is a sort of a chicken-and-egg situation. Regular equity investing becomes truly magical on very long scales of time. My favourite example is that of investing in a hypothetical Sensex-based ETF at the base point of the Sensex in 1979, back when Morarji Desai was the Prime Minister and H. M. Patel the Finance Minister. This is hypothetical because the Sensex itself was launched only in 1986 with a base year of 1979. Anyhow, if you had invested a reasonable sum of Rs 5,000 a month in such a mutual fund till now, you would have about Rs 3.4 crore today.

But the problem is that it’s meaningless for me to tell you this. It’s not very exciting to be told that you could have been much richer if you had had the sense to do something good for the last thirty years. You have to have to have experienced it to believe in it. But if you don’t believe in it, then how are you going to have experienced it? In practice, SIPs fall between this problem of personal experience and the historical primacy of regular fixed-income investing in most Indian’s long-term investing.

Will this ever change? On current evidence, it will change in a slow, organic fashion as an incrementally larger number of people build up a personal experience of the magic that regular, systematic investment can do. Anyhow, all that is meant for those who have to worry about where the mass of investments are going. You just need to worry about our own savings, and I’m sure practically all of it will be going into an SIP that will continue for a long, long time.